Publication: PULP & PAPER INTERNATIONAL
Boxing clever on the global market
Before the most recent expansion of the European Community in 1995, one of the more amusing facts relating to the region's pulp and paper industry was that its smallest paper producing nation, Ireland, was also home to its largest paper and board maker by tonnage, Jefferson Smurfit.
Finland, Sweden and Austria have since joined the European Community, or the European Union as it is now known. Ireland is still the European Union's smallest papermaking nation, but Jefferson Smurfit is no longer in the overall number one slot. Some of the Nordic heavyweights now produce more paper and board than the Jefferson Smurfit group.
The company's position in its chosen business areas remains unchallenged though, and not only in Europe. As possibly Europe's most international paper company, it is now the world's largest producer of containerboard, corrugated containers and folding cartons as well as being its largest wastepaper collector. Jefferson Smurfit is number one in recycled newsprint, paper reclamation, folding cartons and recycled boxboard in the USA, and counts as Europe's largest containerboard and corrugated containers producer.
Expansion is still far from finished as the company is currently targeting the booming Asian market. It already has a controlling interest in a 60,000 ton/yr linerboard mill in Shanghai and plans to expand to 100,000 tons/yr. It is also looking to build or buy box plants in the region, possibly both. Europe will not be neglected though, as the company has also been considering plans for a new corrugated paper machine. Added to that, investment is expected to continue at its North and Latin American operations.
Developing the company from a small corrugated boxmaker in the suburbs of Dublin into a truly international enterprise has obviously been hard work. But it would appear from talking to the CEO, Michael Smurfit, that it has also been a lot of fun. Informal, and with all the eloquence and charm of the Irish, he talks with great pride about the meteoric rise of the company.
Starting with a small, privately-owned company made expansion easier in some ways, he says. With no dividends or share prices to worry about, the company was at liberty to expand and go after market share in the bad years. Acquisition was the credo and by 1995 its two companies - the Dublin-based Jefferson Smurfit Group and its US associate Jefferson Smurfit Corp. - both made it into the top 20 of PPI's Top 150 listing of pulp and paper companies, at number 17 and 19 respectively. If the revenues of the two companies were combined, Jefferson Smurfit would have make it to the number six slot.
Open for business
Despite its size, Smurfit is determined to keep the company's entrepreneurial culture alive. He is still very much involved in day-to-day operations; he likes to go on unannounced mill visits and prides himself on still being on a first name basis with many of the older employees.
As Smurfit says, "The way we do business is open, dynamic, fast moving and informal. We are opportunistic. Recognizing and seizing opportunities as they present themselves. We were the first in Europe to recognize the potential of recycled paper and board production in the USA, for instance.
"We had been looking to expand further after our first acquisition in the UK, but at that time we had nothing to offer European mills. We were a decade too early. We had capital, but no special expertise that European mills did not have. There was no way in. The USA was different, however. Production was still very much virgin fiber-based and we knew how to make recycled paper and boxes. There was no cultural problem either. We had something to offer and we moved in."
And Jefferson Smurfit did it in style. It first bought a 40% shareholding in Time Industries in Chicago in 1974, acquiring full control in 1977. The group then made a series of larger acquisitions in the same fashion until, in 1986, Jefferson Smurfit acquired 50% of the much larger Container Corporation of America from Mobil Oil. The $1,200 million deal was done through Jefferson Smurfit's JS Corp. company in joint venture with the Morgan Stanley Leveraged Equity fund. The move not only more than doubled the company's US operations, it also gave it access to Latin America and several plants in continental Europe.
A major restructuring of the group's US interests in 1989 left it with $1,250 million in cash and the company went on a spending spree in Europe. If a corrugated mill was up for sale, it was a fairly safe bet that Jefferson Smurfit was in the running. Along the way it acquired some of Europe's best and brightest in the corrugated field, but Smurfit is at pains to point out that the company has never paid too much and buying has proved cheaper than building new capacity. "We have never yet won a mill at auction. Proof that we are not overpaying. We paid our entry fee but never destroyed a market," he says.
Although it now has a presence in most European box markets, Jefferson Smurfit has not yet managed to enter the big German market where it owns a corrugating paper mill, CD Haupt, but no box plants.
"We are obviously interested in Germany, but German box plants are already very efficient and the overcapacity means that profitability is low. There is no discipline and the competition is vicious. Although it is a distinct disadvantage not to have a box plant in Germany, we are not interested in making a loss. The jury is still out on Germany," Smurfit says. "Anyway, there is little of size left to buy in Europe's box market which also means that there is no easy path of entry for non-European companies, such as Amcor. Denied the acquisition route, Amcor has had to rely on costly startups to enter markets.
"Around 25% of box capacity is now controlled by three groups, SCA, AssiDomän and Jefferson Smurfit. Nevertheless, more consolidation is coming as each recession is more vicious than the last one, weakening balance sheets. The shake-out will continue."
While keeping an eye out for other opportunities in Europe's box market, the company is upgrading its box plants in Spain and the UK, bringing them up to the standard of its French and Dutch operations. The company is also planning "meaningful steps in Eastern Europe", where its Swedish associate, Munksjö, already operates an envelope plant in Poland.
But the biggest investment in Europe is likely to be in a new corrugating paper machine. France is the most likely location, possibly at a plant in Nanterre near Paris, but its CD Haupt subsidiary in Germany also wants the new PM. No decision has been taken yet, but as Smurfit explains, "The machine is under very active consideration. When remains the question."
Jefferson Smurfit already specializes in recycled paper production, but it has also become a kraftliner producer with the acquisition of the paper and packaging operations of St Gobain in 1994 . It now owns one of Europe's most reputable kraftliner producers, La Cellulose du Pin. Added to this, the company has a 27.5% stake in another European kraftliner producer with a reputation for quality - the Austrian company, Nettingsdorfer.
Today, the Jefferson Smurfit Group is the only company making kraftliner on both sides of the Atlantic. And although it also has sizable US linerboard operations, the company is committed to defending the interests of Europe's kraftliner producers against dumping by non-Europeans, according to Smurfit.
"There should be a much tougher response from the European Commission against any country that dumps, whether Brazilian, American or South African. They cannot be allowed to destroy the market," he says. "We had to shut down our Balaguer mill in Spain during the last recession. We will defend our other mills."
One mill which appears to fit rather uneasily in Jefferson Smurfit's European operations is the coated woodfree papers mill at Condat which was acquired as part of St Gobain's paper interests. Speculation has been rife as to the company's intentions for the company.
"We haven't had time to catch our breath yet with the pulp market in such turmoil, but there are no plans to sell the mill," says Smurfit. "We are investing IR40 million ($64 million) in an expansion program, bringing capacity to 400,000 tons/yr. Ultimately though, a joint venture with a pulp producer would be a more logical solution for Condat.
"Also, we can only grow so big in the corrugated market and if we want to expand further we might have to turn to other grades in the long term. Condat gives us a foothold in the graphic paper market in Europe. We might well keep it. Anyway, Condat is not the first woodfree operation in the company. Our Smurfit Townsend Hook mill in the UK produces such grades."
Not news in Europe
The Jefferson Smurfit Group is the largest producer of recycled newsprint and folding boxboard in the USA, but the company has ruled out expansion into the newsprint and folding boxboard market in Europe. "The door is closed. The folding boxboard market is already too consolidated in Europe. We equally have no intention of moving into newsprint production in Europe. We cannot bring anything new," says Smurfit.
A newsprint mill in China is a long term possibility, however. With newsprint and other paper production in Asia heavily dependent on wastepaper imports, especially from the USA, Smurfit has a distinct advantage as North America's largest wastepaper collector. And, says Smurfit, "We have the raw material supply and the ability to be a low cost producer. Koreans and other Asians are wrong if they think that we will continue to supply them indefinitely with wastepaper so they can compete with our newsprint exports to China and other Asian markets."
So far, expansion in Asia is limited to the brown grades. Jefferson Smurfit has bought a controlling interest in a 60,000 ton/yr linerboard mill near Shanghai in joint venture with a Chinese company. It plans to expand capacity to around 100,000 tons/yr in the near future. The company already operates five folding carton plants in Asia - in Singapore, Hong Kong and China - and it intends to build or buy more units in Vietnam and Malaysia. But any progress will only be made slowly after carefully assessing the risks, Smurfit says.
The company is already experienced in doing business in countries with a less than stable political climate. It is an important player in Latin America, especially in Colombia and Venezuela, where it is a fully integrated producer operating plantations, box plants and pulp and paper mills. Around $80 million has been earmarked to expand its plantation program in the region.
The company is also interested in buying more box plants in the Caribbean and Central America. The potential in Argentina and Chile is also good, Smurfit says, but "we have not won an auction yet". There is less interest in Brazil though, which is "already well catered for".
Investment in wastepaper collection will continue worldwide as "waste papers are the trees of the future". The group is still on the lookout for other opportunities and is always looking "to go with something different". Expansion will undoubtedly continue too, as this tale of entrepreneurship, risk-taking and financial savvy goes on. As Smurfit points out, "There has never been a profit warning out on the company and we have never had to reduce our dividends."
© 1996 Miller Freeman, Inc. All rights reserved.